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Kriszle E.

Laging November 10, 2016


BSAct-3

The Evolution of the Audit Function 4. Non-financial systems

It is important to understand the roots of internal The shift in low-level checking arose when
auditing and the way it has developed over the years. audit acquired a degree of separation from the
accounting function with internal audit sections being
1. Extension of external audit purposely established. This allowed a level of audit
management to develop which in turn raised the
status of the audit function away from a complement
Internal audit developed as an extension of of junior staff completing standardized audit
the external audit programmes.
role in testing there liability of accounting records that contribute
to published financial statements. The UK 5. Chief auditors
&Ireland have suggested this link between external
and internal audit: Another thrust towards a high profile,
The nineteenth century saw the proliferation professional audit department was provided through
of owners who delegated the day-to-day employing chief internal auditors (or chief audit
management of their businesses to others. executives) with high organizational status.
These owners needed an independent
assessment of the performance of their 6. Audit committees
organizations. They were at greater risk of
error, omissions or fraud in the business Audit committees bring about the concept
activities and in the reporting of the of the audit function reporting to the highest levels
performance of these businesses than and this had a positive impact on perceived status.
owner-managers. This first gave rise to the Securing the attention of the board, chief executive,
profession of external auditing. External managing director, non-executive directors and
auditors examine the accounting data and senior management also provides an avenue for
give owners an opinion on the accuracy and high-level audit work, able to tackle the most
reliability of this data. More slowly the need sensitive corporate issues.
for internal auditing of business activities
was recognized. Initially this activity focused 7. Professionalism
on the accounting records. Gradually it has
evolved as an assurance and consulting The Institute of Internal Auditors (IIA) has
activity focused on risk management, some history going back over 50 years. Brinks
control and governance processes. Both Modern Internal Auditing has outlined the
external audit and internal audit exist development of the IIA:
because owners cannot directly satisfy In 1942, IIA was launched. Its first
themselves on the performance and membership was started in New York City, with
reporting of their business and their Chicago soon to follow. The IIA was formed by people
managers cannot give an independent who were given the title internal auditor by their
view. organizations and wanted to both share experiences
and gain knowledge with others in this new
2. Internal check professional field. A profession was born that has
undergone many changes over subsequent years.
The testing role progressed to cover nonfinancial
areas, and this equated the internal audit
8. Expectation Gap
function to a form of internal check. Vast numbers of
transactions were double checked to provide
Audit services will have to be properly
assurances that they were correct and properly
marketed, which is essentially based on defining and
authorized by laid-down procedures. The infamous
meeting client needs. This feature poses no problem
audit stamp reigned supreme indicating that a
as long as clients know what to expect from their
document was deemed correct and above board.
internal auditors. It does, however, become a
concern when this is not the case, and there is a
3. Probity work
clear gap in what is expected and what is provided.
Probity work arrived next as an adaptation
of checking accounting records where the auditors
would arrive unannounced at various locations and
local offices, and perform a detailed series of tests
according to a preconceived audit programme.
Management was presented with a list of errors and
queries that were uncovered by the auditors. The
auditors either worked as a small team based in
accountancy or had dual posts where they had
special audit duties in addition to their general
accounting role.

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